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the Water and Sewer Fund capital program until the planned transition to
utility revenue bonds can be accomplished. The FY 1988 budget request
assumes that the first interest payments on both the 1987 and 1988 issues
will be covered by the appropriation, not by bond proceeds.
As provided by the D.C. Hospital Facilities Construction Act, the District
repays a portion of federal construction grants made to private hospitals.
The District's share is, in most cases, 50 percent of the grant. The
District is contributing its share at the annual rate, without interest, of
3 percent of the total obligations incurred under the act. In addition, a
1955 appropriation act (P.L. 472) authorized the construction of a
maximum-security building at Saint Elizabeths Hospital. Public Law 472
further provided that the District government should repay a proportionate
share of the costs of future construction and major repairs of Saint
Elizabeths' buildings and grounds. The share is based on the cost and life
of the completed projects, not to exceed 40 years, and the number of
patient-days chargeable to the District. Since the hospital assets will be
transferred to the District on October 1, 1987, the FY 1987 share of the
amortized costs is the last the District will pay. The final bill will be
received and the payment made in early FY 1988.
In FY 1983, the U.S. Treasury began charging the Unemployment Compensation
Trust Fund for Treasury cash advances necessitated by shortfalls in
employers' contributions. The economic recovery over the past three years
has ended the need for cash advances, and the District repaid its last
advance in FY 1985. No further advances or interest payments occurred in
FY 1986, and none is expected in FY 1987 or FY 1988.
Appropriated Budget Request
The FY 1988 appropriated request is $220,905,000, an increase from FY 1987
of $16,391,000. This request will provide funds for the following
expenditures:
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The FY 1988 debt service requirement is stated on an accrual basis, the
same basis as that used for District financial reporting purposes and for
the FY 1986 revised budget. The FY 1988 budget request provides funds
for principal and interest payments on outstanding debt to the U.S.
Treasury and the seven outstanding general obligation bond issues.
refunding over $2 billion of outstanding Treasury notes, more than
two-thirds of the District's outstanding long-term debt is in general
obligation bonds. In FY 1988, accrual-basis debt service on the Treasury
notes allocated to the General Fund will be $67,216,000 in FY 1988 and on
the bonds, $131,158,000.
In addition, the long-term capital construction debt service for FY 1988
assumes that the new capital issues planned for 1987 and 1988 will be
sold in July of each year, with 20-year maturity, equal-level payments of
interest and principal, and 2 percent issuance costs. The debt service
budget also assumes the bonds will carry a 6.7 percent interest rate.
The new capital bond issues of 1987 and 1988 will require $18,620,000 in
debt service in FY 1988.
An estimated $100,000 is included in the debt service requirement for the
estimated annual $12,000 fees paid annually to commercial banks for
managing payments on each of the outstanding bond issues. The following
table shows the principal and accrued interest for current and planned
long-term General Fund debt financing.
Interest
$152,852,000* $217,094,000
As shown in the following table, the major changes in the budget for the
repayment of loans and interest from the FY 1987 budget to the FY 1988
request are the $43 million decrease in the annual debt service
expenditure on U.S. Treasury notes, mostly attributable to refunding, and
the $58 million increase in bond debt service. Two refinancings of
Treasury notes not anticipated when the FY 1987 budget was prepared and
the sale of two new general obligation bond issues to provide funds for
capital investment cause these shifts in debt service.
Difference
-$42,715,000
58,408,000*
15,693,000
$ 67,216,000 149,878,000*
*Includes estimated fees of $100,000.
Since the FY 1987 budget for debt service is on a cash basis, the shift
from a cash basis to an accrual basis in the FY 1988 budget will result in
a $53,000 increase in the budgeted debt service. For outstanding Treasury
notes, the accrual basis is $1,633,000 lower than the cash basis would be
in FY 1988. For outstanding bonds the difference is less: the FY 1988
accrual basis is only $632,000 lower than the comparable cash basis.
Because the new capital issues are planned for late in the fiscal year, the
first cash payment on each does not occur until the next fiscal year, even
though interest begins accruing at the time of sale. Therefore, the shift
from the cash to accrual basis will account for $2,318,000 of the total
$18,620,000 increase for the new issues in FY 1988 compared with the
FY 1987 budget.
Budgeting debt service on an accrual basis not only follows the District's
financial reporting practices and the advice of its independent auditor on
debt service measurement but it also meets governmental accounting
standards. The General Accounting Office requires that interest expenses
be accrued as they are incurred--that is, when a transaction or event
occurs that will result in a current or future cash outflow. It is
expected that the Governmental Accounting Standards Board will issue a
recommendation to the same effect before the end of June 1987.
The completion of more large projects on the Saint Elizabeths Hospital
campus, with no offsetting reduction in the number of patient-days
chargeable to the District, accounts for the $698,000 increase in the
amortization of the hospital's construction costs.
The relationship of debt service to the total operating budget of a jurisidiction is a key measure of the jurisdiction's capacity to meet its debt obligations and to finance its capital needs through borrowing. When investors analyze the creditworthiness of a jurisdiction, they look very carefully at this debt service ratio. A high ratio indicates that the jurisdiction may experience relatively greater difficulty in paying bondholders over the term of the issue. One immediate effect of a high ratio may be to raise significantly the interest rates the jurisdiction pays on its new general obligation bonds. Thus heavy borrowing in relation to the total budget results in high borrowing costs for two reasons: (1) the volume of debt to be repaid and, consequently, its associated interest costs are larger, and (2) investors view new debt issues as having greater
risk and demand higher interest rates before they will buy them.
As of September 30, 1986, the ratio of the District's debt service to
revenue was 8.7 percent. Although the Home Rule Charter sets the debt
service ceiling at 14 percent, the District has been advised that it
should keep its debt service ratio well under 10 percent. Following that
policy will help the District to remain competitive in the municipal bond
market. More important, limiting debt service in the long run to a
modest share of the operating budget--about 8 percent--will also permit
the District to maintain a balance between meeting the need for public
facilities and providing direct services to citizens,
The FY 1988 budget inaugurates a new policy to restrict the growth of debt service by reducing the annual additions to capital authority in future years and reducing the amount of the annual borrowing. In past years, the District has been able to borrow more capital funds than the agencies implementing the capital program have been able to spend. This situation is expected to reverse very soon, because if no brakes are applied to capital borrowing and spending and the substantial difference between existing capital authority and available capital financing is not reduced, debt service will not only continue to absorb larger shares of the operating budget but will do so at an increasing rate. Therefore, the new policy limits capital budget requests for the period FY 1989 to FY 1993 to amounts that are not greater than the amounts that can be borrowed within the new debt service ceiling. Some of the pressure on the District's debt service capacity will be eliminated by issuing revenue bonds to finance Water and Sewer Fund capital expenditures as soon as that is feasible.
To institute this new capital budget and debt service policy, FY 1988 will be a transition year. This year will allow the implementing agencies to adjust to the new spending and capital authority limits. The District will borrow $140 million for the General Fund in FY 1988, and the total capital budget will be $277 million, $139 million less than the FY 1987 capital budget.
The following tables show for both the General Fund and the Water and
Sewer Fund the long-term indebtedness payable by year and the annual debt
service on an accrual basis required for outstanding U.S. Treasury notes
and general obligation bonds.
The following table shows the amounts required in FY 1988 for each private hospital funded under the D.C. Hospital Facilities Construction Act:
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